[globalbrooke]

My husband (US citizen) and I (green card holder) purchased property in my home country a few years ago. We now wish to sell the property for a profit. Please tell me if we are obliged to pay any tax on the gain. Could we avoid paying taxes if we "sold" the property (for what we paid for it) to my mother and she then sold the property and "gifted" us the money? Thanks in advance for your reply.

[AtlantaTaxExpert]

Yes, you must report the property sale on Schedule D and pay long-term capital gains tax on the profit derived from the sale.

Your proposal to sell the property to your mother may raise some issues with the IRS since she is a "related party".

Currently, the capital gains tax is, at most, 15%, and it can be as low as 5%. Best just to sell the property and pay the tax.

[Five Rings]

Actually, if you sell the property to your Mother for less than its real value you are making a gift.
"If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift." (Pub. 950)

However, For 2009, you generally can give a gift valued at up to $13,000 each, to any number of people, and none of the gifts will be taxable. Thus, $26,000 would be excluded from tax in your case.

Nevertheless, depending on what country you live in, the associated closing costs for two transfers, (fees, transfer taxes, tax on gain to your Mother, etc.) may make your scheme unprofitable for you.

Give this some thought.

[MukatA]

You will report the sale on schedule D (Form 1040). It will be long term capital gains.
If you paid taxes in a foreign country, then file Form 1116 for foreign tax credit. Net result, you may not owe or owe very little U.S. taxes.

Another filing requirement may be Form TD F 90-22.1. http://taxipay.blogspot.com/2008/03/...h-foreign.html

[IntlTax]

Your suggestion to sell to your mother at below fair market value, have her resell at fair market value and then have her gift you the difference would essentially be tax fraud. Not recommended.

[Five Rings]

I disagree IntlTax. There is nothing fraudulent about it.
Nevertheless, the IRS anticipated this tactic a long time ago and there are sufficient statutes and regulations in place to defeat this particular avoidance technique.

I emphasize avoidance as opposed to evasion. There is no question but this is a "sham" transaction.

I quote from some learned scholars on the issue:
Although legally tax avoidance and evasion may be sufficiently distinct, there is a potential for overlap at the margin. The blurring of the distinction between tax avoidance and tax evasion has led to the coining of the phrase “tax avoision” which covers those cases that fall into that indeterminate zone between the two.

A clear illustration of this point is the situation where a taxpayer obtains a tax advantage in consequence of entering into a sham transaction. The most widely accepted statement of the doctrine is that of Diplock LJ in Snook v London and West Riding Investments Ltd, where his Honour said that a sham

"means acts done or documents executed by the parties to the 'sham' which are intended by them to give to third parties or the Court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create".

Effectively a sham transaction is one where the appearance created by the relevant documents is a façade intended to camouflage or disguise the reality of the transaction. The requisite deceptive element was emphasised by Lord Templeman in Challenge where he said that a sham transaction is one that is "so constructed as to create a false impression in the eyes of the tax authority." A sham transaction is of itself void and has no legal effect. As such it needs no enactment to nullify it.

In this respect such conduct is more akin to evasion than avoidance; yet the use of a sham mechanism to obtain a tax benefit has been treated by the Courts and tax authorities as falling within the scope of tax avoidance.

[IntlTax]

Five Rings, I agree that some transactions might be treated as shams. However, something as blatant as suggested, I think, is closer to tax fraud. It is a slippery slope.

Say I tell my clients to make checks out to my brother, but I fail to mention that he is not a U.S. citizen and that he lives in a tax haven country. I mail him the checks and he deposits the checks in his foreign bank account. He then "gifts" the money back to me and it is less than $100,000. I don't report the receipt of the gifts and I report no income. Would this be merely a sham and not tax fraud?

[Five Rings]

Slippery slope indeed IntlTax, but that is for the courts to decide within the scope of existing Code and regulation.
Should these taxpayers wish to employ this particular tactic (and I would urge them to employ REALLY competent professional counsel) to affect the transaction, they are merely trying to arrange their affairs to keep taxes as low as possible.

As to your example I do not see how it applies.
Where do your clients profit? What tax has been avoided?

[IntlTax]

You've got to be joking! I can't believe that you really are suggesting that they might be able to avoid U.S. tax by engaging in their proposed transaction.

In my example, I perform services for my clients in exchange for gifts from my brother.

[IntlTax]

In their example they sell property to their mother in exchange for gifts from their mother.

[AtlantaTaxExpert]

Sorry, Five Rings, but I have to agree with IntlTax on this one. The IRS' history of looking at such transaction from a holistic view would clearly indicate that these transactions between related-parties were clearly meant to evade taxes, not avoid them.

[Five Rings]

Of course they would but that is beside the point.

This is only an intellectual exercise because, upon close examination, their attempt to avoid taxation is futile.

Look, the sale to the Mother at less than FMV is a gift which they must report. If they do not they are evading; bad on them.

Then, the transfer to Mom is probably exposed to transfer taxes and fees in the country where this property is located.

Then, in addition to more transfer taxes and fees, the gain the Mother enjoys upon sale is no doubt taxable in her home country and only she may claim it.

Let's say the couple sells and gets 50,000 gain taxed at 15% in America... $7,500. They pay tax to the home country on the gain and take a credit against US tax. How stupid to go through all these machinations.

I have been known to joke on occasion but this is not one of them.

Nevertheless, here is one:
Two eighty year old residents of a home for the elderly are sitting on the porch rocking.
The man says to the woman, "I think I'm going to get married again. This time it will be to a gorgeous 20 year old girl."
The woman replies,"Oh yeah! Well I'm going to get married again to a gorgeous 20 year old guy; and let me tell you old timer, 20 goes into eighty a whole lot more times than 80 goes into 20"

[IntlTax]

Could we avoid paying taxes if we "sold" the property (for what we paid for it) to my mother and she then sold the property and "gifted" us the money?

U.S. tax law looks to the substance of the transaction. In this circumstance there was no sale to the mother and there were no gifts to or from the mother. What occurred was, the mother sold the property on behalf of the daughter and her husband. End of story. The daughter and her husband must report the gain on the sale because it is their gain.

"[N]obody owes any public duty to pay more than the law demands." Here, the law demands that the gain be taxed to the daughter and her husband.

[Five Rings]

If a tree falls in the woods and no one is there to hear it does it make a noise?

[AtlantaTaxExpert]

Five Rings:

It is clear that you take a certain demonic pride in your work! :-)

[globalbrooke]

Thanks everyone for all the info.

We definetely don't want to do anything that will get us in trouble, just want to pay the least amount of taxes we can.

Again, thanks for your thoughts and suggestions.

GlobalBrooke

[AtlantaTaxExpert]

Glad to help!